Brexit and US monetary policy dominated global markets in July. Optimism over US-China trade talks increased over the month but has rapidly receded in August following the US announcement of 10% tariffs on a further $300bn of Chinese imports.

A notable feature in July was the weakness of sterling, which fell by more than 4% against the US dollar and nearly 2% against the Euro. The dollar strengthened as Q2 GDP and employment data tempered expectations over the need for the Fed to cut US interest rates by the predicted 50 basis points. The eventual 25 basis point cut seemed more a response to the gloomy global economic backdrop and a need to satisfy market expectations rather than reflecting of the state of the domestic US economy. The outcome of these developments was continued strength in already expensive US equity markets offset by weaker performance in emerging markets and commodities. Sterling also weakened following the election of Boris Johnson as Prime Minister and his apparent willingness to accept a no-deal Brexit. This also led to the continued relative underperformance of the more domestic small and mid-cap equity indices.

Weak manufacturing data in Europe, evidence that a weaker Chinese economy is impacting industrial demand as well as concerns over the resolution of Brexit saw bond yields outside the United States fall. 10 year German bond yields moved further into negative territory, yielding -0.62% at the month end whilst UK yields fell a further 20 basis points to 0.62%. In the stock market economically sensitive and domestic sectors, such as Chemicals, Mining, Banks and Life Insurance performed poorly whilst defensive sectors, such as Tobacco, Aerospace and Pharma performed strongly helped by the currency translation, positive trading news and further increases in historically high valuations.

In July TB Wise Multi-Asset Income made a loss of 0.11% compared its benchmark, the CBOE UK All-Companies Index, which gained 2.02%. Year to date the fund has gained 8.34%, well below its benchmark which has returned 15.49%.

We continue to believe that equity yields remain highly attractive relative to that available from 10-year corporate bonds. Furthermore, a more substantial value opportunity lies in domestic UK equities, such as Life Insurance, Property & Construction. Whilst mindful of the risks of a disorderly Brexit, valuations in these areas are anomalously low in stark contrast to growth stocks and bonds, which have rarely been more expensive. The disparity in valuations between traditional value and growth areas is now more extreme that it was at the time of TMT bubble. As rhetoric around trade wars deepens and evidence builds of weaker outlook for earnings of industrial companies, we expect to see further opportunities to add to these companies.

July is a month full of corporate trading updates. Asset managers, Polar Capital and Ashmore, delivered positive trading updates with encouraging fund net inflows. Vodafone shares responded well to improved organic service revenue, plans to spin off its EU tower portfolio and regulatory approval for its Liberty Global acquisition. New River Reit announced recent lettings that support the case that rents are affordable whilst its portfolio of pubs delivered good growth. This appears at odds with its current earnings yield of over 12%. Marstons, a food-led pub operator, had a mixed trading update as the poorer weather impacted recent trading. An increased focus on debt reduction and a takeover offer for a competitor helped mitigate poorer trading performance. A more challenging consumer backdrop was also highlighted by McColls and Lookers. Elementis, XP Power and Page Group, each highlighted cyclical weakness but each felt the first half represented a trough. Low cyclically-adjusted earnings multiples suggest this economic slowdown has been overly discounted in valuations. Our international investment trust holdings all performed well during the month.

We exited our holding in Telford Homes following a takeover approach and initiated a position in Morgan Sindall, a provider of construction, fit out, housing and regeneration services. A valuation multiple of less than 8x earnings and a yield of 5% fail to reflect the strength of its balance-sheet, strong market positions and end market diversification. We topped up domestic holdings such as Palace Capital, Henry Boot, Lookers, Bakkavor and New River Reit. We exited Inchcape reflecting concerns over weakness in the automotive sector and reduced Ashmore following strong share price performance. We added to RPS following a severe share price reaction to weaker trading last month and increased our holding in XP Power, a high-quality manufacturer of power supply solutions to industrial, medical and semiconductor customers.

Tony Yarrow 31 Jul 2019
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